Taking steps to reduce personal debt

The recession appears to be over. But the recovery is anemic. While gross domestic product is increasing, unemployment hovers near 10 percent. And there is great deal of uncertainty about the future.

Adding to the uncertainty, many people find themselves mired in debt.

Between mortgages, car payments and credit cards, American households are struggling to keep their heads above water. For example, the average credit card debt per household last year was about $8,300.

How do you know if you have a potential debt problem? As a general guideline, if your monthly non-mortgage debt exceeds 20 percent of your take-home pay — or if your monthly mortgage payments exceed 30 percent of your take-home pay — you may be overextended.

What can you do to reduce your debt? The first step is to develop a realistic budget that allows you to reduce your expenditures. As you do this, you will be surprised at some of the items that can be eliminated from your monthly expenditures.

Once you have a workable budget, you can start attacking the debt beast.

Begin by paying off your credit-card debt with the highest interest rate first.

Once you have accomplished this, start on the debt with the next highest interest rate.

If possible, you may also want to consider transferring your credit card debt to a single card with a lower rate. Shop around for the best rate. This will reduce the interest you pay over the life of the loan.

As you incur debt in the future, keep one point in mind. Generally, use debt only for two types of items.

First, borrow money for purchasing things that will increase in value, such as a home.

Second, use debt for items that have long-term usefulness. This includes consumer durables such as washing machines, refrigerators or computers.

As a final note, do not use credit cards for dining out, movies, vacations or similar activities.